While the Russia-Ukraine war has created a significant opportunity for the cybersecurity industry, and investor interest in cybersecurity companies has increased with firms preparing for potential cyberattacks from Russia, the broader tech selloff has been marring the industry’s upside potential.

Recently, St. Louis Fed President James Bullard said that the U.S. Federal Reserve needs to raise its benchmark interest rate to 3.5%. Concerns over aggressive interest rate hikes are dampening investor sentiment about tech and cybersecurity stocks. This is evident in the iShares Cybersecurity and Tech ETF’s (IHAK) 3.5% decline over the past five days.

Though demand for cybersecurity is expected to remain strong due to rapid worldwide digitization and consequent increase in cyber threats, overvalued stocks with weak financials could witness a downtrend in the near term.

Therefore, we think fundamentally weak cybersecurity stocks Okta, Inc. (OKTA - Get Rating) and Rapid7, Inc. (RPD - Get Rating), which are currently trading at lofty valuations, are best avoided now.

Click here to checkout our Cybersecurity Industry Report for 2022

 Okta, Inc. (OKTA - Get Rating)

San Francisco-based OKTA provides identity solutions for enterprises, small- and medium-sized businesses, universities, non-profits, and government agencies in the United States and internationally. With more than 7,000 pre-built integrations to applications and infrastructure providers, OKTA provides simple and secure access to people and organizations everywhere.  

Raymond James analyst Adam Tindle recently downgraded OKTA to Market Perform from Strong Buy.  

OKTA’s total revenue increased 63.2% year-over-year to $383.01 million for its fiscal  fourth quarter, ended Jan. 31, 2022. However, its net loss came in at $241.19 million, compared to a $75.81 million net loss in the year-ago period. Its loss per share came in at $1.56, compared to a $0.58 loss per share in the previous period. Furthermore, its cash and cash equivalents came in at $260.13 million for the period ended Jan. 31, 2022, compared to $434.61 million for the period ended Jan. 31, 2021.

In terms of forward EV/S, OKTA’s 12.89x is 311.3% higher than the 3.13x industry average. Moreover, its 12.93x forward P/S is 296.4% higher than the 3.26x industry average.

OKTA’s EPS is expected to remain negative in 2023 and 2024. Also, its EPS is estimated to decrease 171.7% in 2023. It shares have declined  33.7% in price over the past year to close yesterday’s trading session at $147.57.

OKTA’s POWR Ratings reflect its poor prospects. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting. The stock has an overall D grade, equating to Sell in our POWR Ratings system.

OKTA has a D grade for Value, Stability, Sentiment, and Quality. Click here to access the additional POWR Ratings for OKTA (Growth and Momentum). OKTA is ranked #27 of 31 stocks in the F-rated Software – Security industry.

Rapid7, Inc. (RPD - Get Rating)

Boston-based RPD provides cyber security solutions. The company offers a cloud-native insight platform that enables customers to create and manage analytics-driven cyber security risk management programs.

RPD’s total revenue increased 34% year-over-year to $151.64 million for the fourth quarter, ended Dec. 31, 2021. However, its non-GAAP net loss came in at $8.93 million, compared to a $3.73 million loss in the prior-year period, while its non-GAAP loss per share came in at $0.16, compared to a $0.07 loss per share in the previous period. In addition, its non-GAAP gross margin came in at 71% compared to 73% in the year-ago period.

In terms of forward EV/S, RPD’s 10.09x is 222.1% higher than the 3.13x industry average. Furthermore, its 9.08x forward P/S is 178.5% higher than the 3.26x industry average.

Analysts expect RPD’s EPS to decline at the rate of 57.1% for the quarter ended June 30, 2022. The stock has declined 8.8% in price year-to-date to close yesterday’s trading session at $107.39.

RPD has an overall D rating, which equates to Sell in our POWR Ratings system. It has a D grade for Value.

We have also rated it for Growth, Momentum, Stability, Sentiment, and Quality. Click here to access all the RPD ratings. It is ranked #22 in the  Software – Security industry.

Click here to checkout our Cybersecurity Industry Report for 2022

OKTA shares were trading at $144.71 per share on Friday afternoon, down $2.86 (-1.94%). Year-to-date, OKTA has declined -35.45%, versus a -4.99% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries. More...

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